Will You Be Able to Retire?

No matter how much money we may be saving
for retirement, one nagging question lingers: Will it be enough?

Online retirement calculators aim to help
solve that mystery. They can be useful tools, but don't rely on them for
bankable forecasts, experts say.

"They are good because
they give people a rough idea of how much they have to save," says William
Bernstein, co-principal of portfolio manager Efficient Frontier Advisors in
Eastford, Conn. "They are bad in that they pretend too much
precision."

A
calculator can be like a compass, telling you whether you are heading in the
right direction, but you still have to take the steps necessary to reach your
goals, which for many people means controlling spending and saving more.

Retirement calculators have
proliferated as traditional pensions grow scarce and Americans take greater
responsibility for funding their retirement plans. They typically ask for basic
information such as age, current salary and savings, expected return on
investments, anticipated Social Security benefits and life expectancy. Many
calculators also ask how much you want to spend each year in retirement.

Based
on that data, they try to determine whether you are on track to meet your goals
or in danger of running out money before you die. Some also tell you how much
more you should save now to boost the odds of a comfortable retirement.

Yet the calculators rely on answers to
questions that often are impossible to know in advance, and if the numbers you
plug in turn out to be off-base, the numbers that come out will be, too. And
bad numbers could translate into you having a lot less money than you expected.

Take a 45-year-old with $100,000 in annual
income and $250,000 in savings who is preparing to retire at age 65 and is
saving $12,000 a year. If she predicts her investments will grow 8% a year, one popular
retirement-income calculator—offered by asset
manager Vanguard Group—says she would have $5,639 in monthly retirement income,
including Social Security. If that proves too optimistic and her investments
grow only 6% a year, she would have only $4,699 a month.

Retirement calculators often
present their responses in different formats and using different terms, which
can make it difficult to compare results. Many companies provide them to
participants in their 401(k) plans.

Darrow
Kirkpatrick, a 53-year-old former software engineer in New Mexico, got widely
divergent answers from several different calculators when he viewed the outlook
for a married couple, both 60 and about to retire.

Mr.
Kirkpatrick's conclusion? "It's best to run several calculators and
compare the results."

Here is
what you need to know about getting the math right—and understanding how it
could go wrong[…]